Growth unlikely in the weak Russian economy

Mar 07 2018

On Tuesday, March 6, the Atlantic Council, a Washington-based think-tank, organized a panel discussion on the state of the Russian economy. Panelists discussed sanctions, a perceived brain drain and the absence of meaningful reforms in President Putin’s recent annual address.

The discussion began with an overview of the state of the Russian economy by Aleksashenko, who outlined the short and long-term factors that are predicted to limit economic growth to the 1.5-2 percent range over the coming six-year political horizon. The Russian Central Bank has successfully curbed inflation, but in order to do this, it has had to raise interest rates to very high levels, making credit very expensive for businesses and thus leading to weaker growth.

Meanwhile, the Ministry of Finance is seeking to rein in its budget deficit – despite very low national debt – while not raising taxes, as promised by Putin. This is expected to lead to spending cuts, lower investment, frozen wages and pensions, and lower living standards.

In the banking sector, a crisis among banks has prompted the state to take over, with nine out of Russia’s 10 biggest banks currently in state ownership. This means banks “will sooner rely on political motivations rather than economic”, said Aleksashenko .

In addition to these macroeconomic factors, Aleksashenko said stagnation is the result of a poor investment climate depicted by the poor protection of property rights, a lack of rule of law and the clampdown on free media. Thus, businesses are not inclined to invest and this is something that neither the Ministry of Finance nor the central bank can solve.

“This is a political agenda that is in the hands of the president”, said Aleksashenko, adding that supporting rule of law would lead to Putin’s party losing its majority in the parliament. “I don’t foresee him making any progress in the next six years,” he said.

Aleksashenko also mentioned sanctions and demographics as long-term factors of weak growth. The former could lead to a growing technology gap between Russia and the West and the latter – with a shrinking labor force and an increasing number of pensioners – will add pressure on the pension system and the budget, further reducing investment.

The war over living standards

Commenting on Putin’s recent annual address to the Russian parliament, Aslund of the Atlantic Council noted that the words – reforms, sanctions, and Ukraine – were all missing from the speech. “What Putin told us is that he is not going to do reforms whatsoever for his next six-year term”, said Aslund.

Aslund outlined a number of factors harming the Russian economy: Putin’s control of the state, the FSB and the court system, cronyism and the use of state corporations for “personal benefit”.

“As long as Russia doesn’t have property rights, about 4-5% of GDP leaves the country each year”, said Aslund. And there is little incentive for Putin and the elites to ensure property rights in Russia if they have property rights abroad, he said, adding that large sums of money are being kept in luxury properties in Miami, New York, and London.

Meanwhile, Aslund said, war has become a distraction for citizens suffering from the declining living standards in Russia. “Russia cannot afford serious wars”, said Aslund, adding that in the era of hybrid wars, there is less need for direct military expenditures. The panelists agreed that if Putin had to choose between military spending and higher living standards, he would choose the first.

On the bright side, Osetinskaya of UC Berkeley said that the technology sector has developed rapidly and despite some negative trends, there is a growing number of entrepreneurs who open small and medium-sized businesses. However, there is also a large brain drain, with many educated people leaving Russia due to a lack of opportunities. “The government and the state don’t address their needs”, said Osetinskaya.

Another trend is that small and medium-sized businesses have sought investment opportunities abroad, whereas the oligarchs’ fortunes are flowing back into Russia due to the sanctions, said Osetinskaya.

by Valeria Jegisman

Boris Nemtsov Plaza Unveiled in Washington, D.C.

Feb 28 2018

The Boris Nemtsov Plaza was unveiled during a ceremony in Washington, D.C., on Tuesday, Feb. 27. A part of Wisconsin Avenue from Edmunds street to Davis street, directly in front of the Russian Embassy, has officially been renamed in honor of the prominent Russian opposition leader who was shot dead in 2015.

The ceremony was attended by Nemtsov’s friends and family, as well as members of the U.S. Congress, State Department, and DC Council.

Among others who gave speeches during the event were Vladimir Kara-Murza, chairman of Boris Nemtsov Foundation; Boris Nemtsov’s daughter Zhanna Nemtsova, and Senator Marco Rubio, who initially introduced legislation to name a street after Nemtsov a year ago.

Senators Roger Wicker, Chris Coons, and Ron Johnson, who co-sponsored the legislation, spoke at the event.Also present were Assistant Secretary of State for the European and Eurasian Affairs Wess Mitchell, Congresswomen Ileana Ros-Lehtinen and Eleanor Holmes Norton. D.C. Council Chairman Phil Mendelson and D.C. Council member Mary Cheh, who introduced a law renaming the street on the local level after the initiative stalled in Congress, spoke at the ceremony. The D.C. Council unanimously passed the law in January 2018.

In her opening statement, Natalia Arno, president of Free Russia Foundation, which organized the unveiling ceremony, said everyone present could agree “we wish we never had a reason for this memorial and that Boris Nemtsov would still be with us.” She thanked those gathered at the ceremony “in honor of the life of a man who many of us view as the soul of the Russian pro-democracy movement.”

Kara-Murza of the Nemtsov Foundation said the renamed street is the “first official commemoration of Boris Nemtsov anywhere in the world,” something not possible in Russia.

Kara-Murza continued, “You have done something more to commemorate Boris Nemtsov,” referring to the recent concession by Moscow authorities to allow activists to put a plaque on the house where Boris Nemtsov lived. After blocking all initiatives to commemorate Nemtsov for three years, Moscow “probably realized how it looks when the U.S. commemorates a Russian statesman while Moscow refuses to do so,” he said.

Kara-Murza said Nemtsov “became the embodiment of a very different Russia” – a free, democratic country that “respects its citizens and lives at peace with the neighbors.” He said Nemtsov gave his life for this and that “the best possible tribute to him, to his legacy, is a free and democratic Russia, and that day will come.”

The former politician’s daughter, Nemtsova, said “two struggles have been unfolding” since the assassination of Nemtsov – a fair investigation of his death and an effort to commemorate him. She noted that unofficial memorials erected by volunteers at Moskvoretky bridge, where Nemtsov was killed, have been removed more than 70 times.

Senator Rubio said that Nemtsov was “an outspoken critic of Vladimir Putin and his regime’s corruption, invasion of Ukraine and that ultimately led him to the tragic fate. The street sign directly outside of the Russian Embassy serves as an enduring reminder to Vladimir Putin and to those who support him that they cannot use murder, violence, and intimidation to silence the voices of freedom and dissent.”

Rubio added, “We have to stand with thousands of Russians who peacefully protest against corruption and illegitimate elections. It is our hope that one-day Russian people will have leaders who protect the fundamental liberties and freedoms of all their citizens and leaders who will be very proud to have Boris Nemtsov’s name outside of the embassy here in Washington.”

Senator Coons said the legacy of Nemtsov, who helped open the Russian Embassy in Washington DC in 1994, is “a stark reminder of how different a path Russia has taken from that day.”

D.C. Council member Mery Cheh said that Russian authorities may prevent commemorations of Nemtsov in Russia, but they cannot do it here.

“This commemoration will not be removed. This commemoration will stay here as a symbol to Boris Nemtsov,” Cheh said.

By Valeria Jegisman

Experts: Russia unlikely to free itself of authoritarianism in near term

Feb 06 2018

Last Thursday (Feb. 1), the Atlantic Council, a Washington-based think-tank, held a panel discussion on The Direction of Russian Politics and the Putin Factor as a part of its series on domestic Russian affairs.

The discussion explored Russia’s system of political power, the personal role of Putin and future scenarios. Looking ahead at the years to come, experts did not expect major changes in Russian politics, with some predicting harsher times for the Russian opposition.

The panel of experts included:

Dr. Yevgenia Albats, a Russian journalist and political scientist, editor-in-chief of The New Times

In her assessment of Russia’s political transformation since Vladimir Putin became president in 2000, Dr. Albats found that there has been a transition from “personalistic authoritarianism” to the corporatism seen in Benito Mussolini’s Italy and Francisco Franco’s Spain.

Eight years after Putin first became president, the number of key administrative positions held by the cadres from the KGB, the GRU and the military – known as the siloviki – had increased to 67%, according to Ms. Albats. By 2015, Russian government institutions had been completely overtaken by them, forming a clan with a shared background and beliefs on domestic and foreign politics.

Albats said that never before had the “political police” been completely in charge as it is now, having previously answered to the Communist Party or Tsarist power. As such, Putin has become a hostage of the system that he has helped create, but “a willing hostage” who is fully aware of his situation and will remain “a face of this corporation” for some time, said Albats.

Ms. Albats finds that corporatist authoritarianism is more predictable and stable than personalistic regimes, as it is more consolidated and governed by shared rules. In this regard, she said it is “difficult to expect positive change in Russia”.

Ms. Albats also noted a new phenomenon that has developed in Russia – “hereditary capitalism,” referring to the children of the powerful. This “new Russian nomenklatura” have taken leading positions at financial institutions, state entities, and governmental agencies. Many of these people were educated in the West and while they may not have fully adopted Western democratic values, they “may bring some change and possibilities of democratic development” in the future, said Albats. In this regard, there is a parallel with the “children of nomenklatura” of the Soviet era, who was a “sort of vehicle in opening the country”.

Mr. Kozyrev noted that authoritarianism can be traced back hundreds of years in Russian history and has become a “vicious circle”. The current regime’s domestic and foreign policies – including its “military adventures” in Syria and Ukraine – are “contrary to the national interest of Russia,” said Mr. Kozyrev. “The interest of the regime is to steal in Russia and to spend in the West”, while keeping Russia under control through propaganda, said Mr. Kozyrev. To combat this, Western governments should focus on seizing the regime’s illegitimate foreign assets, he said.

In Dr. Rumer’s view, Russian authority is more of a clan-based system than a corporatist one. Although the Kremlin is the dominant force, the system still contains different clans and interest groups that originated in the 1990s. The rivalry between these clans has been visible in uncertain periods, such as the end of Putin’s second term as president in 2007-2008. Mr. Rumer doesn’t foresee any major changes in the next six years – as he believes the system will be able to deal with uncertainty, domestic challenges and discontent – but the situation may change after 2024.

Ambassador Vershbow agreed that the regime has become more corporatist than a dictatorship with a “single strongman calling all the shots.” Still, he doesn’t see Putin being dictated by the “corporation” as “they need him as the dispenser of illicit wealth.” But it is not certain whether there would be “cohesion” among the “members of the corporation” if Putin were to go.

Mr. Vershbow said the regime has been relatively successful in marginalizing the opposition without resorting to excessive force.

“They are being careful not to make Navalny into a martyr,” said Mr. Vershbow. “But I fear if he is successful with the boycott and deprives Putin of his 70 percent turnout and 70 percent approval in the so-called elections, harsher measures could come, remembering the assassination of Boris Nemtsov has to have been signed off at senior levels of the regime”.

In terms of the future, Vershbow predicts further clashes with the West, regardless of whether Putin is in power or a successor, since “the leaders of this corporation believe in their own propaganda.”

By Valeria Jegisman

Atlantic Council panel disappointed with “Kremlin report”

Feb 02 2018

Experts gathered at the Atlantic Council, a Washington-based think-tank, have expressed disappointment in the U.S. government’s “Kremlin report” which was released earlier this week, calling it “puzzling and inexplicable”.

The Trump administration’s handling of the report – mandated by Congress as a basis for sanctions in response to Russian meddling in the 2016 U.S. elections – has caused confusion among critics of the Putin regime. While the Russian leadership had been panicking over the threat of new sanctions, the report itself comes off as superficial and reluctant to instate new sanctions.

On Wednesday, Jan. 31, a day after part of the report was released to the public, the Atlantic Council held a panel discussion attended by:

Ambassador Daniel Fried, distinguished fellow at the Atlantic Council and former coordinator on sanctions policy at the U.S. Department of State;

Andrei Piontkovsky, a visiting fellow at Hudson Institute and a senior adviser for Free Russia Foundation;

Andrei Illarionov, a senior fellow at Cato Institute and a former chief economic adviser to Vladimir Putin;

Ms. Laura Rosenberger, a senior fellow and director of the Alliance for Securing Democracy at the German Marshall Fund.

The Atlantic Council has previously recommended a framework for determining which individuals and companies the new U.S. sanctions should target.

Reacting to the report on Wednesday, Mr. Fried characterized it as weak and surprising. Although the administration has had since August 2017 to produce the report, it appears to have been compiled in a hurry without proper analysis, he said. It “remains somewhere between puzzling and inexplicable,” said Fried.

A central component of the report, a list of political and business figures identified as having close ties to Putin, leaves the impression that it was simply “taken from official Russian documents and Forbes’s list of wealthy people.”

Nevertheless, fried noted that the much longer unclassified section of the report sent to the U.S. Congress may have more substance.

Moreover, he said, the Kremlin should not expect resistance towards Russian aggression to dissipate, referring to “the democratic senators who released a strong letter urging the U.S. administration to reconsider its approach.”

Mr. Illarionov said the report has been quickly dismissed by the Russian elite. The list of politically sensitive individuals is not even completely accurate, he said, as for example one head of a state corporation identified in the report no longer holds his position. Moreover, Illarionov said, some names on the list can’t be taken seriously as having any important connection to the Russian president.

Furthermore, the unclassified section of the report is also missing information requested by Congress, such as an assessment of net worth, business assets and evidence of corruption. Illarionov expressed hope that this information is included in the classified part of the report, but “it is difficult to comment on the document that no one has actually seen so far.”

Mr. Piontkovsky said publishing the information on business assets and corruption is very important to the Russian people. The Russian opposition has long sought U.S. assistance to combat money-laundering and expose Russia’s kleptocrats. “The dimension of hidden Russian assets in the U.S. is around $1 trillion – this is a robbery of a millennium,” said Piontkovsky. “Never in the history of human conflict have so many been robbed by so few,” he added.

Piontkovsky said the report is a “blow to our efforts to undermine Russian kleptocracy,” but he expressed optimism that the classified part of the report will eventually be released.

Even if the list complied might feel like a “joke,” said Ms. Rosenberg, the Kremlin should not feel safe in the aftermath of the report’s publication. The report’s enabling legislation, known as CAATSA, had bipartisan support in Congress. “This is an issue that Congress is not going to let go,” said Rosenberg.

She noted that the purpose of CAATSA is to deter interference in U.S. or EU elections in the future. The U.S. administration has undermined its credibility, she said, while the Kremlin has hit the “democratic core” of the U.S. and its allies.

The panelists also noted the absence of the issue of Russian sanctions in the President Donald Trump’s State of the Union address this week.

On Monday night, Jan. 29, the U.S. Treasury Department publicly released its much-anticipated “Kremlin report,” which singles out members of the Russian political and business elite with close ties to Vladimir Putin’s government.

The document explicitly names 114 senior officials and 96 oligarchs, while details about their income and evidence of corruption remain classified in a 100-page section of the report.

The report was prepared by the U.S. Treasury, the State Department and various intelligence agencies, as mandated by the Countering America’s Adversaries Through Sanctions Act (CAATSA) – a sanctions law signed by the U.S. president in August 2017 as a measure against Russia’s actions in Ukraine, human rights violations in Russia, and allegations of interference in the 2016 U.S. elections.

CAATSA requires the U.S. administration to provide Congress a list of “the most significant senior foreign political figures and oligarchs” with ties to the Kremlin, detailing their connections, source of wealth, family members’ business assets and evidence of corruption.

Among those on the list are Putin’s chief of staff Anton Vayno and prosecutor general Yuriy Chayka, as well as billionaires Roman Abramovich, Petr Aven, Mikhail Fridman and Оleg Deripaska – the latter is also under scrutiny for his connection to former Trump campaign manager Paul Manafort.

Reacting to the report on Monday, Andrei Piontkovsky, a visiting fellow at the Hudson Institute and a senior adviser with Free Russia Foundation, said the inclusion of so many people on the list – representing “the Kremlin’s phonebook and the Forbes list” – may not be taken seriously. In fact, many of the names on the list – which includes many from Putin’s “politburo” – are of huge political significance, says Piontkovsky, who previously participated in the Atlantic Council’s independent initiative to draw up a set of recommendations for determining the sanctions targets.

Ilya Zaslavskiy, a researcher with Free Russia Foundation, said even more individuals should be included in the report. The rather limited circle of people hints at indecision and only scratches the surface, he said. “As shown in our research in 2016, when the sanctions target only a small number of people, it doesn’t actually work,” he says.

Notably, the new report states that the list revealed to the public does not in of itself imply an imposition of sanctions, nor does it impose any legal consequences for people with business ties to those on the list. However, on Tuesday, Jan. 30, U.S. Treasury Secretary Steven Mnuchin said that new sanctions will be implemented after the report initially drew criticism earlier in the day. Experts say the classified part of the report will provide the basis for further sanctions, which could be announced within a few months.

Piontkovsky said the fact that no new sanctions have yet been announced, and that part of the report remains classified, has come as a relief to Moscow – but it may be a mistake to interpret the report in this way. While Piontkovsky would support the public release of the full report, especially for the benefit of the Russian public, he says the very existence of the document is “an imminent political threat for Russia’s entire political class.”

“A mechanism has been created to impose the toughest sanctions – namely, to freeze and confiscate $1 trillion – at any time, depending on the degree of Moscow’s aggression. This is an astronomical figure!” said Piontkovsky.

Zaslavskiy notes that the absence of sanctions in the current version of the “Kremlin report” is a technicality to avoid legal action, but that the report actually sends a very strong political message to the Russian government.

Zaslavskiy also expects the U.S. Congress to call for more significant measures, and he expects more individuals to be added to the “Kremlin report” over the course of this year.

“I am convinced that the list will be expanded and I am sure that sanctions will be imposed on specific individuals,” he said. “On our part, we will work with senators to identify names that we believe are currently missing from the list.”

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